Opinion
No. C 03-01750 WHA.
May 19, 2004
ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S APPLICATION FOR DEFAULT JUDGMENT
INTRODUCTION
Plaintiff Harbor Bay Isle Associates applies for entry of default judgment against defendants Avram "Avi" Lebor and M.K.D. Capital Corporation. This order GRANTS IN PART AND DENIES IN PART plaintiff's application.
STATEMENT
On April 21, 2003, plaintiff Harbor Bay Isle Associates commenced the instant action against Avram Lebor, Wayne Schaffner, Wade Schaffner and M.K.D. Capital Corporation. The underlying dispute arises out of a contract in which defendants agreed to provide a mortgage loan to plaintiff in the principle amount of $54,700,000, to pay off another loan then encumbering a parcel of land owned by plaintiff in Alameda, California. The following sets forth the basic facts.
The claims raised in this case were assigned to plaintiff by HB Commercial, LLC, a Nevada limited liability company and an original party to the contract at issue herein. Plaintiff is a general partnership and the sole member and owner of HB Commercial, LLC (Exh. 90). It is unclear from the complaint or the materials submitted with this application when the assignment occurred, although it appears all facts giving rise to the instant dispute occurred prior to the assignment. This order will refer to Harbor Bay Isle Associates as "plaintiff" since it is the party seeking relief.
On August 7, 2000, plaintiff submitted an application provided by defendants to obtain a loan in the sum of $54,700,000 (Exh. 90). The purpose of the loan was to pay off an existing loan in favor of Lehman Brothers Holdings, Inc., which was secured by a 75-acre parcel of the Alameda property. The parties agreed that the first $32,000,000 of the total loan amount would be paid to Lehman Brothers. Another $5,630,000 would be used to pay closing costs and loan and brokerage fees. The remaining $17,070,000 would then be funded at closing into an escrow or blocked bank account in plaintiff's name to pay interest under the loan and various carrying costs ( ibid.). The loan was to be evidenced by a promissory note and deed of trust representing at closing a first mortgage security interest in the 75 acres of land in Alameda (Brimhall Decl. ¶ 10).
Under the terms of the application, plaintiff agreed to make two deposits of $136,750, the first at the time it submitted its application and the other upon defendants' "commitment" to fund the loan (Exh. 90). The total deposit was to be fully refundable if, through no fault of plaintiff, defendants did not fund the loan ( ibid.). Upon the signing of the contract on August 7, 2000, plaintiff deposited $136,750 into an account of defendant M.K.D. Capital Corporation, a New York corporation with its principal place of business in New York (Exh. 89). Lebor, M.K.D.'s president, thereafter signed the application on September 15, 2000, which triggered defendants' "commitment" to fund the loan (Exh. 90). A few days later on September 19, 2000, plaintiff transferred a second payment of $136,750 to the corporation's bank account (Exh. 86). M.K.D. acknowledged receiving the full deposit of $273,500 (Exh. 22). The loan was to be funded by November 15, 2000 (Exh. 90).
Defendants, however, did not obtain the mortgage loan as agreed notwithstanding numerous affirmations over approximately a two-year period that the loan would be funded. The record here contains repeated assurances by defendants in e-mails and letters that plaintiff would obtain the agreed-upon loan. Neither did defendants refund any part of the $273,500 previously deposited. This too was despite at least one amendment to the original agreement confirming that the deposit would be so refundable (Exh. 81). As a result of defendants' failure to perform, plaintiff lost the 75-acre parcel in Alameda through foreclosure (Exh. 19).
As discussed more fully below, defendants, at the time of the transaction with plaintiff, were engaged in a pattern of similar activity whereby they would obtain an advance of fees in exchange for a promise to obtain loans or financing. Their conduct is the subject of a criminal indictment pending in the United States District Court for the Southern District of New York. In the instant civil proceeding, plaintiff contends the foregoing facts give rise to the following claims: (1) breach of contract; (2) fraud and deceit; (3) conversion; (4) common law conspiracy; (5) alter ego liability against a corporation and its controlling shareholder on a corporate obligation; (6) money had and received; (7) violations of the Racketeer Influenced and Corrupt Organizations Act; and (8) conspiracy under the RICO statute.
Plaintiff originally served all defendants with the summons and complaint on April 23, 2003. Defendants did not serve plaintiff with a responsive pleading within twenty days as required by Rule 12(a)(1)(A), or otherwise appear in this case. On May 29, 2003, plaintiff requested the clerk of the court enter the default of defendants Avram Lebor and M.K.D. Capital Corporation. The clerk declined to do so on June 12, 2003. Plaintiff thereafter submitted proof that summons had been returned executed as to defendants Lebor and M.K.D. Plaintiff's second motion for entry of default against those defendants was granted August 7, 2003. Plaintiff then voluntarily dismissed its claims against defendants Wayne Schaffner and Wade Schaffner under Rule 41(a)(1) on December 9, 2003.
Plaintiff now requests entry of judgment by default and an award of damages in excess of $50,000,000. It seeks compensatory damages of $273,500, consequential damages of $17,070,000, and treble damages under 18 U.S.C. § 1964(c). Plaintiff additionally requests an award of attorney's fees and costs.
The instant application was filed April 1, 2004, nearly an entire month following the dispositive-motion deadline of March 4, 2004, set forth in the case management order. Nonetheless, a trial on this matter would be futile in light of defendants' failure to appear. This order will thus rule on plaintiff's application.
ANALYSIS
Under Rule 55(b)(2), a party may apply to the court for entry of default judgment. There is no matter of right to the entry of a default judgment, and its entry is entirely within the discretion of the trial court. Draper v. Coombs, 792 F.2d 915, 924 (9th Cir. 1986). In the Ninth Circuit, a court is to consider the following factors in exercising this discretion:
(1) the possibility of prejudice to the plaintiff; (2) the merits of plaintiff's substantive claim; (3) the sufficiency of the complaint; (4) the sum of money at stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether the default was due to excusable neglect; and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.Eitel v. McCool, 782 F.2d 1470, 1471-72 (9th Cir. 1986). Consideration of these factors favor entry of default judgment in this case.
1. MERITS AND SUFFICIENCY OF THE COMPLAINT.
After entry of default, well-pleaded allegations in the complaint regarding liability are taken as true, except as to the amount of damages. Fair Housing of Marin v. Combs, 285 F.3d 899, 906 (9th Cir. 2002). Thus, there can be no dispute as to the material facts on this record. Consequently, this order finds that Eitel factors two, three and five weigh in favor of entry of default judgment. This order does not reach the merits of each of plaintiff's claims. It is sufficient that plaintiff has set forth allegations to prevail on its claim under the Racketeer Influenced and Corrupt Organizations Act.
A violation of 18 U.S.C. § 1962(c) requires: (i) conduct (ii) of an enterprise (iii) through a pattern (iv) of racketeering activity. See Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 (1984). This action arises out of a scheme by defendants to defraud plaintiff of $273,500 through false representations that the money would be used as a commission to obtain a real estate loan of $54,700,000. In reliance upon these representations, plaintiff approved the transactions and transferred $273,500 to defendant M.K.D. Capital Corporation, which was portrayed as a vibrant firm involved in the brokerage of loans. M.K.D., however, had been dissolved because of the non-payment of state taxes on December 29, 1999. The fraudulent scheme continued for over two years, with defendant Lebor individually and through M.K.D. making repeated misrepresentations to plaintiff regarding the ultimate delivery of the loan. The record herein contains dozens of e-mails and letters from defendants assuring plaintiff that the subject loan would be funded pursuant to the agreed-upon terms. These communications are specific as to time, place and nature and sufficient to establish the necessary predicate acts. In time, each of those assurances proved to be false.
Moreover, the record amply supports a finding that defendants were perpetrating a pattern of collecting loan-application fees in advance of the loan transactions from other entities like plaintiff. Similarly, those transactions never transpired as defendants never had the capability or intention of fulfilling their agreed-upon obligations. The Court has taken judicial notice of the criminal complaint filed in the Southern District of New York charging defendant Lebor and others with conspiracy to commit the type of wire fraud here at issue. As alleged in the criminal complaint:
It was a part and an object of the conspiracy that Avram Lebor, a/k/a "Avi Lebor" . . . and others known and unknown, unlawfully, willfully and knowingly, having devised and intending to devise a scheme and artifice to defraud, and for obtaining money and property by means of false and fraudulent pretenses, representations and promises, to wit, a scheme to defraud loan applicants of millions of dollars in advance fees, by falsely promising to provide loans, and then failing to fund the loans and refusing to return the advance fees, would and did transmit and cause to be transmitted by means of wire communications in interstate and foreign commerce, writings, signs, signals and sounds for the purposes of executing such scheme and artifice, in violation of Title 18, United States Code, Section 1343.
(Pl. Req. Exh. A). The allegations of conspiracy set forth by plaintiff are nearly identical to the above-referenced criminal charges. This order finds that plaintiff has alleged facts to support all the elements of a RICO conspiracy.
2. THE REMAINING EITEL FACTORS.
This order finds that on balance the remaining Eitel factors likewise favor entry of default judgment. To deny plaintiff's application would leave plaintiff without a remedy.
3. DETERMINATION OF DAMAGES.
Plaintiff seeks compensatory damages of $273,500, consequential damages of $17,070,000, and treble damages under 18 U.S.C. § 1964(c), as well as attorney's fees and costs. Under Section 1964(c), the following civil remedy is available for violations of RICO:
Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee . . .
This record supports a finding that plaintiff was injured when it paid defendants a deposit of $273,500 in contemplation of the services to be rendered. That deposit was to be fully refundable should, through no fault of plaintiff, defendants fail to fund the loan as promised. Defendants did not perform. Plaintiff is entitled to the return of its deposit. As required under RICO, plaintiff is entitled to have its damages trebled. This results in a total damage award of $820,500.
Throughout its complaint, however, plaintiff also seeks consequential damages in the amount of $17,070,000. Had defendants obtained the loan as agreed, this sum would have been funded at closing into an escrow or blocked bank account in plaintiff's name to allow plaintiff to pay interest and various carrying costs, among other things. As counsel conceded at the hearing, however, plaintiff eventually would have had to repay this specific amount of the loan (like all the other amounts received under the loan).
In a supplemental filing made after the hearing in this case, plaintiff proffered an alternative theory of recovery. The contention is that the $17,070,000 figure was only an estimated amount of the equity plaintiff had in the property that it eventually lost to foreclosure. Plaintiff now contends a slightly modified consequential-damage award of $16,340,000 would be appropriate. Of this amount, $15,340,000 represents the true amount of plaintiff's equity in the subject property. Plaintiff seeks to recover another $1,000,000 it purportedly paid to Lehman Brothers Holdings, Inc., to extend the deadline by which Lehman Brothers was to receive the payment of $32,000,000 to satisfy its mortgage loan. This new theory is curious in light of the detailed allegations of the complaint and the extensive original filing made on this application for default judgment, which included 91 exhibits and numerous declarations explaining plaintiff's claims and the damages stemming therefrom. Nonetheless, plaintiff does not contest that it would have remained obligated to repay $17,070,000 (only a portion of what plaintiff would have received per its loan arrangement with defendants). This is sufficient to deny plaintiff's request for consequential damages.
Under Section 1964(c), plaintiff is entitled to reasonable attorney's fees and costs incurred. Plaintiff's original application sought attorney's fees of $50,080.75 and costs of $495.90, as supported by the detailed billing statements submitted herein. At the hearing, additional billing records were provided to verify recently incurred expenses. Taken together, this order finds an attorney's fee award of $54,395.60 to be reasonable and warranted. Plaintiff shall also recover $542.70 in costs.
CONCLUSION
For good cause shown, plaintiff's application for entry of default judgment is GRANTED IN PART AND DENIED IN PART. Plaintiff is entitled to $820,500.00 in damages, $54,395.60 in attorney's fees and $542.70 in costs. A judgment so providing shall issue under separate cover.